Key Tax Changes Affecting 2026 Returns

Tax year 2026 brings several important changes that will impact how individuals file their taxes. These updates, driven by the One Big Beautiful Bill Act (OBBBA) and standard IRS inflation adjustments, affect deductions, credits, and tax rates. Understanding these shifts can help taxpayers prepare for filing in 2027.

Higher Standard Deduction and Permanent Tax Rates

The IRS has announced inflation adjustments for the standard deduction amounts for tax year 2026. These figures are set to increase from the previous year, offering a larger deduction for many taxpayers. For single filers, the standard deduction will be $16,100. Those filing as head of household can expect a standard deduction of $24,150. Married couples filing jointly will see a standard deduction of $32,200.

In addition to the adjusted standard deduction, the OBBBA makes the seven federal income tax rates permanent. These rates, which range from 10% to 37%, will now remain in place without future legislative changes. This provides a stable tax rate structure for taxpayers.

New Senior Deduction Available

Taxpayers aged 65 or older may qualify for an additional deduction for the 2025 through 2028 tax years. This senior deduction allows individuals to claim an extra $6,000, and married couples where both spouses meet the age requirement can claim $12,000. This benefit applies whether or not the taxpayer itemizes deductions.

However, this additional deduction begins to phase out for those with higher incomes. For single filers, the phase-out starts when modified adjusted gross income (MAGI) exceeds $75,000. For joint filers, the threshold is $150,000. The deduction reduces by six cents for every dollar earned above these limits. It is important to remember this is a deduction, which lowers taxable income, not a direct reduction of tax owed.

Increased State and Local Tax (SALT) Deduction Cap

The cap on the State and Local Tax (SALT) deduction sees a slight increase for 2026. The maximum amount taxpayers can deduct for state and local taxes will be $40,400, up from $40,000 in 2025. This higher limit is scheduled to be in effect through 2029.

Similar to the senior deduction, the SALT deduction cap phases down for higher earners. The phase-down begins for MAGI above $505,000, but the deduction will not fall below $10,000. This adjustment offers a bit more relief for taxpayers in states with higher tax burdens.

Charitable Deduction for Non-Itemizers

A new provision allows taxpayers who take the standard deduction to deduct cash contributions. Starting in 2026, individuals can deduct up to $1,000 in cash gifts, and married couples filing jointly can deduct up to $2,000. This applies to direct cash donations and does not include contributions made to donor-advised funds.

This provision offers a tax benefit for charitable giving to those who do not itemize their deductions. Itemizers, on the other hand, have a separate limit for charitable gifts, which is subject to a floor of 0.5% of their adjusted gross income.

Deductions for Qualified Tips and Overtime

The OBBBA also includes provisions for deductions related to qualified tips and overtime premium pay. These rules are in effect for tax years 2025 through 2028. Eligible workers can deduct up to $25,000 in qualified tips. For overtime premium pay, the deduction is capped at $12,500 for individuals and $25,000 for joint filers.

These deductions are subject to income-based phase-outs. For individuals, the phase-out begins above $150,000 in MAGI, and for joint filers, it starts at $300,000. It is crucial to note that only the premium portion of overtime wages is deductible, not the entire overtime amount. These deductions reduce taxable income.

Increased Child and Dependent Care Credit

Families paying for child and dependent care services will benefit from an increased credit for tax year 2026. The credit can now cover up to 50% of eligible expenses, a significant rise from the previous 35% rate. This credit directly reduces the amount of tax owed, unlike deductions which lower taxable income.

Additionally, the Child Tax Credit remains at $2,200 per child under 17 for 2025 and 2026 and is now permanent. This credit also has income phase-out thresholds, beginning above $200,000 for individuals and $400,000 for joint filers. Both the child and the parent claiming the credit must have a Social Security number.

Note on 2027 Tax Figures

It is important to distinguish between the tax changes for 2026 and those for 2027. The IRS has already released inflation adjustments for tax year 2027, which will affect returns filed in 2028. For example, the standard deduction for a single filer in 2027 will be $16,600. Taxpayers should refer to the correct year’s figures when preparing their tax filings.

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